United States Government Accountability Office GAO November 2005 Report to the Secretary of the Treasury_part1 potx

GAO United States Government Accountability Office Report to the Secretary of the Treasury November 2005 FINANCIAL AUDIT Bureau of the Public Debt’s Fiscal Years 2005 and 2004 Schedules

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GAO

United States Government Accountability Office

Report to the Secretary of the Treasury

November 2005

FINANCIAL AUDIT

Bureau of the Public Debt’s Fiscal Years

2005 and 2004 Schedules of Federal Debt

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What GAO Found

Why GAO Did This Study

Accountability Integrity Reliability

Novem ber 2 0 5

FINANCIAL AUDIT

2

Highlights of GAO-06-169 , a report to the

Secretary of the Treasury

GAO is required to audit the

consolidated financial statements

of the U.S government Due to the

significance of the federal debt

held by the public to the

governmentwide financial

statements, GAO has also been

auditing the Bureau of the Public

Debt’s (BPD) Schedules of Federal

Debt annually The audit of these

schedules is done to determine

whether, in all material respects,

(1) the schedules are reliable and

(2) BPD management maintained

effective internal control relevant

to the Schedule of Federal Debt

Further, we test compliance with

selected provisions of significant

laws related to the Schedule of

Federal Debt

Federal debt managed by BPD

consists of Treasury securities held

by the public and by certain federal

government accounts, referred to

as intragovernmental debt

holdings The level of debt held by

the public reflects how much of the

nation’s wealth has been absorbed

by the federal government to

finance prior federal spending in

excess of federal revenues

Intragovernmental debt holdings

represent balances of Treasury

securities held by federal

government accounts, primarily

federal trust funds such as Social

Security, that typically have an

obligation to invest their excess

annual receipts over disbursements

in federal securities

In GAO’s opinion, BPD’s Schedules of Federal Debt for fiscal years 2005 and

2004 were fairly presented in all material respects and BPD maintained effective internal control related to the Schedule of Federal Debt as of September 30, 2005 GAO also found no instances of noncompliance in fiscal year 2005 with selected provisions of the statutory debt limit and debt issuance suspension period laws we tested

As of September 30, 2005 and 2004, federal debt managed by BPD totaled about $7,918 billion and $7,379 billion, respectively At the end of fiscal year

2005, debt held by the public as a percentage of the U.S economy is estimated at 37.5 percent, compared to 33.0 percent at the end of fiscal year

2001 Further, certain trust funds (e.g., Social Security) continue to run surpluses, resulting in increased intragovernmental debt holdings These debt holdings are backed by the full faith and credit of the U.S government and represent a priority call on future budgetary resources As a result, total gross federal debt has increased 37 percent between the end of fiscal years

2001 and 2005 During fiscal year 2005, a debt issuance suspension period was invoked to avoid breaching the statutory debt limit On November 19,

2004, legislation was enacted to raise the debt limit by $800 billion to $8,184 billion

As shown below, total federal debt increased over each of the last 4 fiscal years Debt held by the public increased during this 4-year period primarily

as a result of annual unified budget deficits Intragovernmental debt holdings steadily increased during this 4-year period primarily due to excess receipts over disbursements in federal trust funds

$3,339

$2,453

$3,553

$2,660

$3,924

$2,859

$4,307

$3,072

$4,601

$3,317

As of September 30

Total Gross Federal Debt Outstanding

(in billions)

Held by the Public Intragovernmental Debt Holdings

Figure 1

$5,792 $6,213 $6,783 $7,379 $7,918

Source: BPD.

www.gao.gov/cgi-bin/getrpt?GAO-06-169

For a fuller understanding of GAO’s opinion on

BPD’s fiscal years 2005 and 2004 Schedules of

Federal Debt, readers should refer to the complete

audit report, available by clicking the link above,

which includes information on audit objectives,

scope, and methodology For more information,

contact Gary T Engel at (202) 512-3406 or

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Page i GAO-06-169 Schedules of Federal Debt

Contents

Overview, Schedules,

and Notes

14 Overview on Federal Debt Managed by the Bureau of the Public

Debt 14

Notes to the Schedules of Federal Debt 25

Appendixes

Appendix I: Comments from the Bureau of the Public Debt 30

Appendix II: GAO Contact and Staff Acknowledgments 31

Abbreviations

BPD Bureau of the Public Debt GDP gross domestic product OMB Office of Management and Budget TIPS Treasury Inflation Protected Securities

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Page 1 GAO-06-169 Schedules of Federal Debt

Washington, D.C 20548

Comptroller General

of the United States

A

The Honorable John W Snow The Secretary of the Treasury Dear Mr Secretary:

The accompanying auditor’s report presents the results of our audits of the Schedules of Federal Debt Managed by the Bureau of the Public Debt for the fiscal years ended September 30, 2005 and 2004 The Schedules of Federal Debt present the beginning balances, increases and decreases, and ending balances for (1) Federal Debt Held by the Public and

Intragovernmental Debt Holdings, (2) the related Accrued Interest Payables, and (3) the related Net Unamortized Premiums and Discounts managed by the bureau.1

The auditor’s report contains our (1) opinion on the Schedules of Federal Debt for the fiscal years ended September 30, 2005 and 2004, (2) opinion on the effectiveness of related internal control as of September 30, 2005, (3) conclusion on the bureau's compliance in fiscal year 2005 with selected provisions of laws we tested, and (4) conclusion on the consistency between information in the Schedules of Federal Debt and the accompanying Overview on Federal Debt Managed by the Bureau of the Public Debt

As of September 30, 2005 and 2004, federal debt managed by the bureau totaled about $7,918 billion and $7,379 billion, respectively, for moneys borrowed to fund the federal government’s operations As shown on the Schedules of Federal Debt, these balances consisted of approximately (1) $4,601 billion as of September 30, 2005, and $4,307 billion as of September 30, 2004, of debt held by the public and about (2) $3,317 billion

as of September 30, 2005, and $3,072 billion as of September 30, 2004, of intragovernmental debt holdings

The level of debt held by the public reflects how much of the nation’s wealth has been absorbed by the federal government to finance prior federal spending in excess of federal revenues It best represents the cumulative effect of past federal borrowing on today’s economy and the

1 Intragovernmental Debt Holdings represent federal debt issued by Treasury and held by certain federal government accounts, such as the Social Security and Medicare trust funds

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federal budget To finance a cash deficit, the federal government borrows from the public When a cash surplus occurs, the annual excess funds can then be used to reduce debt held by the public In other words, annual cash deficits or surpluses generally approximate the annual net change in the amount of federal government borrowing from the public

Cash surpluses during fiscal years 1998 through 2001 enabled Treasury to reduce debt held by the public by $476 billion, from $3,815 billion as of September 30, 1997, to $3,339 billion as of September 30, 2001 Treasury reduced this debt by redeeming maturing debt, reducing the number of auctions and size of new debt issues, conducting “buybacks” of debt before its maturity date, and redeeming callable securities when the opportunities arose.2 However, because of the return to deficits, in fiscal years 2002 through 2005, debt held by the public increased by $1,262 billion, with about $294 billion of this increase occurring in fiscal year 2005 Treasury issued more debt by increasing the number of auctions and the size of new debt issues During fiscal year 2003, Treasury reintroduced the 3-year note, which will be offered every quarter In addition, Treasury increased the offerings of the 5-year note from quarterly to monthly; the 10-year note from an offering every quarter to eight offerings a year; and the 10-year Treasury Inflation-Protected Security (TIPS) from three offerings a year to

an offering every quarter During fiscal year 2004, Treasury introduced a 20-year TIPS, first issued on July 30, 2004, and a 5-year TIPS, first issued on October 29, 2004 Both securities will be offered semiannually During fiscal year 2005, Treasury announced the reintroduction of the 30-year bond, which was suspended in October 2001 The 30-year bond will be issued semi-annually with the first issuance to be on February 15, 2006 Notwithstanding the increases in fiscal years 2002 through 2005, debt held

by the public as a percentage of total federal debt has decreased from approximately 71 percent as of September 30, 1997, the first year the Schedule of Federal Debt was audited, to approximately 58 percent as of September 30, 2005

Intragovernmental debt holdings represent balances of Treasury securities held by federal government accounts, primarily federal trust funds, that typically have an obligation to invest their excess annual receipts over disbursements in federal securities Most federal trust funds invest in special U.S Treasury securities that are guaranteed for principal and interest by the full faith and credit of the U.S government These securities

2

During this period, Treasury eliminated the 3-year note and the 52-week bill

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are nonmarketable; however, they represent a priority call on future budgetary resources Certain of these trust funds, such as the Social Security and federal civilian employee retirement trust funds, have been running cash surpluses, which are loaned to the Treasury and reduce the current need for the federal government to borrow from the public in order

to finance current operations As a result of total trust fund surpluses, intragovernmental debt holdings have increased by approximately $1,734 billion during fiscal years 1998 through 2005, from $1,583 billion as of September 30, 1997, to $3,317 billion as of September 30, 2005, with about

$245 billion of this increase occurring in fiscal year 2005

Intragovernmental debt holdings as a percentage of total federal debt have increased from approximately 29 percent as of September 30, 1997, to approximately 42 percent as of September 30, 2005

The transactions relating to the use of the federal government accounts’ surpluses net out on the federal government’s consolidated financial statements because, in effect, they represent loans from one part of the federal government to another Importantly, these intragovernmental debt holdings also constitute future obligations of the Treasury since the

Treasury must provide cash to redeem these securities in order for the individual accounts to pay their benefits or other obligations as they come due When this occurs, if sufficient cash surpluses are not available to redeem the securities, the federal government would either need to

increase borrowing from the public, raise future taxes, reduce future spending, retire less debt (if the budget as a whole is in surplus), or some combination thereof It also should be noted that the surpluses in the federal government accounts could have served to reduce interest rates on the debt held by the public as compared to what the rates might have been had these surpluses not been available

While both are important, debt held by the public and intragovernmental debt holdings are very different Debt held by the public approximates the federal government’s competition with other sectors in the credit markets Federal borrowing absorbs resources available for private investment and may put upward pressure on interest rates In addition, interest on debt held by the public is paid in cash and represents a burden on current taxpayers It reflects the amount the federal government pays to its outside creditors In contrast, intragovernmental debt holdings perform an

accounting function but typically do not require cash payments from the current budget or represent a burden on the current economy In addition, from the perspective of the budget as a whole, interest payments to federal government accounts by the Treasury are entirely offset by the income

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received by such accounts—in effect, one part of the federal government

pays the interest and another part receives it This intragovernmental debt and the interest on it represents a claim on future resources and hence a burden on future taxpayers and the future economy when it has to be redeemed to meet obligations under the respective programs However, these intragovernmental debt holdings do not fully reflect the federal government’s total future commitment to trust fund financed programs They primarily represent the cumulative historical surpluses of those trust funds and also reflect future priority claims on the U.S Treasury They do not have the current economic effects of borrowing from the public and do not currently compete with the private sector for available funds in the credit markets However, when trust funds redeem Treasury securities to obtain cash to fund expenditures, and Treasury borrows from the public to finance these redemptions, there is competition with the private sector and thus an effect on the economy

During fiscal year 2005, Treasury faced the challenge of managing the debt within the statutory debt limit On October 14, 2004, Treasury entered into a debt issuance suspension period A debt issuance suspension period is any period for which the Secretary of the Treasury has determined that

obligations of the United States may not be issued without exceeding the debt limit.3 Actions taken by Treasury, which were consistent with legal authorities provided to the Secretary, included suspending investment of receipts of the Government Securities Investment Fund (G-Fund) of the federal employees' Thrift Savings Plan, the Exchange Stabilization Fund, and the Civil Service Retirement and Disability Trust Fund (Civil Service fund); redeeming Civil Service fund securities early; suspending the sales of State and Local Government Series nonmarketable Treasury securities; exchanging Treasury securities for Federal Financing Bank securities; and postponing an auction of Treasury bills On November 19, 2004, legislation was enacted to raise the statutory debt limit by $800 billion to $8,184 billion.4 Subsequently, Treasury restored all losses to the G-Fund and Civil Service fund in accordance with legal authorities provided to the Secretary

of the Treasury

During our audits, we have noted certain trends—the increase in the amount of Treasury securities held by foreign and international investors

3

5 U.S.C §§ 8348(j)(5)(B), 8438(g)(6)(B).

4

Pub L No 108-415, §1, 118 Stat 2337 (Nov 19, 2004)

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and the increased costs to finance the federal government’s growing debt Foreign and international investors are a major holder of debt held by the public Over the last 3 years, foreign and international holdings have significantly increased According to amounts reported in the September

2005 Treasury Bulletin, Treasury estimates that the amount of Treasury

securities held by foreign and international investors has increased from about $1,135 billion as of June 30, 2002, to $2,030 billion as of June 30, 2005,

or $895 billion As of June 30, 2005, this represents an estimated 45 percent

of total debt held by the public During the same 3-year period, debt held

by the public increased by $1,064 billion, from about $3,464 billion to $4,528

billion Based on amounts reported in the September 2005 Treasury

Bulletin, the estimated increase in holdings by foreign and international investors represents about 84 percent of the increase in debt held by the public over the same period The United States benefits from foreign purchases of Treasury securities because foreign investors fill part of the U.S government’s borrowing needs However, to service this foreign-held debt, the U.S government must send interest payments abroad, which adds

to the incomes of residents of other countries rather than to the incomes of U.S residents In addition, this increasing reliance on foreign investors to finance the deficits of the U.S government presents a potential risk to the U.S economy, especially since the U.S gross national saving rate is low by U.S historical standards and averages well below that of other major industrialized nations

Rising interest rates on Treasury securities—although relatively low by historical standards—are contributing to an increased cost to finance the federal government’s growing debt The interest rate for 13-week Treasury bills increased from a low of 1.68 percent during fiscal year 2005 to 3.44 percent as of September 29, 2005 Also during fiscal year 2005, the interest rate on 2-year Treasury notes increased from a low of 2.50 percent as of November 1, 2004, to 4.00 percent as of September 30, 2005 About $2,130 billion, or 46 percent, of marketable Treasury securities held by the public

as of September 30, 2005, will mature at least once during the next 2 years The Congressional Budget Office projects that interest rates on Treasury securities, especially short-term rates, will continue to increase As such, as the Treasury securities mature over the next 2 years and are replaced by new debt, the interest rates on the majority of the new issuances will likely

be higher than the September 30, 2005, rates and result in continued increased cost to finance the federal government’s debt Thus, the

combined effect of greater levels of debt and higher interest rates will likely place increasing pressure on the federal budget in the years ahead

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The challenge of managing the federal debt is not likely to diminish any time soon Debt held by the public continues to grow at a faster pace than the economy At the end of fiscal year 2005, debt held by the public as a share of gross domestic product (GDP) is estimated at 37.5 percent, compared to 33.0 percent at the end of fiscal year 2001—the lowest ratio since 1983 In addition, gross federal debt has increased 37 percent during the same period, from $5,792 billion as of September 30, 2001, to $7,918 billion as of September 30, 2005 Further, interest on debt held by the public grew more rapidly than any other major spending category in 2005, rising 14 percent above the 2004 level While growth in the debt held by the public-to-GDP measure does not necessarily create problems in the short term, continued growth in the long term would reduce budgetary flexibility and ultimately lead to an unsustainable fiscal path

In fact, GAO’s long-range fiscal policy simulations show that the nation’s current fiscal condition is but a prelude to a much more daunting long-term fiscal challenge.5 The pending retirement of the Baby Boom generation and rising health care costs will place unprecedented and long-lasting stress on the federal budget, raising debt held by the public to unprecedented levels

as a share of GDP These projected trends are compounded by the

presence of near-term deficits that have arisen from new discretionary and mandatory spending as well as lower revenues as a share of the economy Absent significant changes on the spending and/or revenue sides of the budget, these long-term deficits will encumber a growing share of federal resources and test the capacity of current and future generations to afford both today’s and tomorrow’s commitments Continuing on this

unsustainable path will gradually erode, if not suddenly damage, our economy, our standard of living and ultimately our national security

As discussed earlier, federal debt managed by the bureau totaled about

$7.9 trillion at the end of the fiscal year, or more than $26,000 for every man, woman, and child in this country today But that number excludes many items, including the gap between future promised and funded Social Security and Medicare benefits, veterans’ health care, and a range of other commitments and contingencies that the federal government has pledged

to support If these items are factored in, the present value of the total burden is about $46 trillion Stated differently, the total burden for every American is more than $150,000—and every day that burden becomes

5

See GAO, Our Nation's Fiscal Outlook: The Federal Government's Long-Term Budget

Imbalance, http://www.gao.gov/special.pubs/longterm.

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